1099-R Question: What happens if employer pays terminated participant distribution out of business instead of plan?

[Guest DIGMYDOG]

Well, here's a good one. I hope someone out there has a suggestion as to what I should do.

Terminated participant from a Profit Sharing Plan (no 401(k) contributions) gets paid out in 2004,Trustee (same as employer) issues the check from the business checkng account instead of withdrawing the funds from the plan. So now, the plan still has her money in it, but she was indeed paid out.

What do we do now? Should the employer issue the 1099-R instead of the plan, and the plan call her money forfeitures (that would look pretty wierd on the valuation reports), or should the plan reimburse the employer, and issue the 1099-R anyway (even though it is clear on the 5500 that there was no pay-out or expense due to a benefit payment).

Any suggestions out there? Any help would be appreciated.

Thank you!

[Blinky the 3-eyed Fish]

What you have in effect is a loan from the employer to the plan. This may be covered under PTE 80-26 depending on the details. Barring any document provisions that prevent it, the plan should reimburse the employer.

The 1099 should report the distribution as from the plan. As of the date of the distribution the plan should accrue the liability of the distribution amount and report it accordingly on the 5500, etal.

[No Name]

Call the payment a contribution. Allocate the terminated employee's money as that contribution.

Expense the employee's account as a distribution from the plan. 1099 from the plan.

[Kirk Maldonado]

Isn't there an issue as to whether the employee could elect to use special tax treatment on the distribution (e.g.roll it over into an IRA)? Because it isn't a payment from a qualified plan, that favorable tax treatment may not be available.

[No Name]

We don't know what the amount is yet. Might make a difference.

[Blinky the 3-eyed Fish]

No Name, I don't understand your post. Call the payment a contribution? Isn't that like calling a distribution a contribution. You must mean something else. Care to explain?

[mbozek]

How much was the payment? If the amount was small treat the payment as w-2 comp for 04 and process a distribution from the plan in 05 and issue 1099 from plan for 05.

[Blinky the 3-eyed Fish]

Mbozek, could you explain why they would do that? Worst case is that it is a prohibited transaction and the excise tax is a fraction of the effective double payment you propose.

Also, if the distribution was taken as cash, 20% was withheld for taxes as plan withholding. Treating the payment as W-2 would send that tax payment off to Neverneverland for awhile until it could be recovered with a 945 filing. If the payment was rolled over, well then treating it as W-2 would negate the rollover ability and cause all kinds of confusion.

[mbozek]

Why is the er payment a PT if it is not paid by the plan? I would deem it to be a payment of comp since it was not paid from plan assets and file a w-2. If the 20% withholding was collected the amount could be credited against withholding taxes owed by participant when the payment is made from the plan. If it was rolled over the participant can withdraw the payment. My suggestion assumed that the amount of the payment is small and it would be easier to recharacterise the payment as wages instead of trying to reverse the transaction because the payment is a PT with all of the collateral complications involved but feel free to take another option.

[Blinky the 3-eyed Fish]

The PT may result if the plan reimbursed the ER in a manner than is outside of PTE 80-26. If the ER wanted to eat it, then of course, no PT.

[SoCalActuary]

Has anyone considered calling the employer a nominee payor for the plan? The employer has the resources to do tax withholding and file the required information returns.

The point about the distribution as a contribution is that the employer paid money on behalf of the plan, and would normally receive those funds from the trust to reimburse itself. However, the employer also sends funds to the plan as contributions. Why send two checks?

If the employer records the payment as a contribution on their books, then the trust fund can credit the distribution due against the employer contribution due.

[mbozek]

Its only a PT if the er deems the payment to be a PT. Its an example of the question of if a tree falls in the forest and no one hears its fall is there a sound.

[Blinky the 3-eyed Fish]

SoCal, I am glad you understood No Name. That makes sense but still brings us back to the potential PT, and in case of audit it dilutes the paper trail showing the repayment to the ER.

Mbozek, true, although the path of least resistence may be to call it a PT, or maybe it's not even a PT.

[E as in ERISA]

Was there plan distribution paperwork -- notices, etc. preceding the distribution? If so, it sounds like the paperwork indicates that the employer loaned money to the plan (the employer temporarily paying operating expenses of the plan). Under current PTE 80-26, it is not a PT if repaid within 3 days. It sounds like its been longer than 3 days? So it would potentially be a PT.

You could try and claim that it wasn't repaid in the 3 days because the employer is making a contribution in an equal amount and they simply offset each other. So no PT. But I'm presuming that the documentation doesn't show that.

Or you could say that this is not an expense of the plan -- that it is wages and has nothing to do with the plan. And make a separate distribution. But again what does the documentation show?

There is a proposed amendment to the 3 day rule. Maybe the DOL isn't overly concerned with the three days from an enforcement standpoint. But the amendment won't be effective for past transactions.

http://www.dol.gov/ebsa/regs/fedreg/notices/2004027451.htm